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A primal-dual algorithm for BSDEs

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  • Christian Bender
  • Nikolaus Schweizer
  • Jia Zhuo

Abstract

We generalize the primal-dual methodology, which is popular in the pricing of early-exercise options, to a backward dynamic programming equation associated with time discretization schemes of (reflected) backward stochastic differential equations (BSDEs). Taking as an input some approximate solution of the backward dynamic program, which was pre-computed, e.g., by least-squares Monte Carlo, our methodology allows to construct a confidence interval for the unknown true solution of the time discretized (reflected) BSDE at time 0. We numerically demonstrate the practical applicability of our method in two five-dimensional nonlinear pricing problems where tight price bounds were previously unavailable.

Suggested Citation

  • Christian Bender & Nikolaus Schweizer & Jia Zhuo, 2013. "A primal-dual algorithm for BSDEs," Papers 1310.3694, arXiv.org, revised Sep 2014.
    • Handle: RePEc:arx:papers:1310.3694
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    References listed on IDEAS

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